FDIC Drops Reputational Risk, Boosts Crypto Industry

The Federal Deposit Insurance Corporation (FDIC) has announced a significant shift in its approach to bank supervision by eliminating "reputational risk" as a criterion. This decision comes after the Office of the Comptroller of the Currency (OCC) made a similar move earlier in March. The change is widely seen as a major victory for the cryptocurrency industry, as it removes a vague and subjective factor that had previously hindered banks from engaging with crypto-related activities.

David Sacks, the White House "Crypto Czar," hailed the FDIC’s decision as a significant correction, calling it “a big win for crypto.” He criticized the use of reputational risk, stating that it was often used to justify the denial of banking services to lawful crypto businesses through Operation Chokepoint 2.0. Sacks emphasized that banking criteria should be objective and quantitative, rather than based on the potential for untrue stories.

Operation Chokepoint 2.0 was an alleged effort by regulators under the previous administration to prevent banks from engaging with the crypto industry. This included the denial of banking services for crypto-related businesses. Sacks credited Senator Tim Scott for leading the legislative effort through the FIRM Act, which aims to codify the removal of reputational risk standards across all federal financial regulators. The Act mandates that institutions cannot be denied access to financial services based on the subjective perception of risk unconnected to a violation of law or regulation.

Senator Scott had previously criticized the use of reputational risk to debunk industries, calling it a “weaponization of rules.” The OCC’s move to cease examining regulated institutions for reputational risk and remove references to the term from its supervisory handbook and guidance was intended to clarify that examinations should focus strictly on operational, legal, and financial risk factors. Acting Comptroller Rodney E. Hood emphasized that the OCC’s oversight should be rooted in banks’ risk management processes, not public perception of particular business activities.

Representative French Hill, vice chair of the House Financial Services Committee, echoed Sacks’ sentiment, calling the move a positive development for the industry. He noted that under the previous administration, the FDIC was wasting resources targeting crypto firms instead of focusing on their core mission. Hill praised the current administration for working to right the ship.

Industry experts also celebrated the FDIC’s decision. Matthew Sigel, head of digital assets research at VanEck, called it a “big win against Chokepoint 2.0,” stating that removing reputational risk means “fewer excuses to debank industries they don’t like.” Nic Carter, partner at Castle Island Ventures and co-founder of blockchain data aggregator Coinmetrics.io, described reputational risk as “a circular mechanic that allows bank regulators to cut off any industry they dislike.” James Kibbie of Galaxy Digital said it is encouraging to see steps being taken to eliminate vague and subjective policies and stop Operation Chokepoint 2.0, adding that the usage of reputational risk has significantly hindered “American innovation.”

The removal of reputational risk as a factor in bank supervision is expected to have far-reaching implications for the crypto industry. It could lead to increased adoption of cryptocurrencies and blockchain technology by traditional financial institutions, fostering innovation and competition in the financial sector. Additionally, it may attract more investment and talent to the crypto industry, further driving its growth and development. This move by the FDIC is part of a broader trend towards greater regulatory clarity and support for the crypto industry, reflecting a growing recognition of the need for a balanced regulatory approach that promotes innovation while protecting consumers and maintaining financial stability. As the crypto industry continues to evolve, it is likely that we will see further regulatory developments aimed at fostering its growth and integration into the mainstream financial system.